How to Audit Comapnies in India

The audit of a company is a systematic and independent process where the books of accounts and the statutory books are examined to determine if the financial and non-financial disclosures of the company are true and fair.

Company audit is conducted by a qualified Chartered Account, who is appointed as the auditor of the company. Once the audit is complete, the opinion of the auditor is expressed in an Auditor’s Report.

Types of Audit

Company audits in India are classified as follows:

  1. Statutory Audits
  2. Internal Audits

Requirement

Statutory Audit

Internal Audit

Applicability

All companies irrespective of nature of business or turnover

Classes of companies mentioned under the Companies Act

Auditor

Independent Chartered Account or a firm of chartered accounts

Independent Chartered Account or a firm of chartered accounts (other than statutory auditor) / Cost accountant / any other professional that the company deems fit

Scope

Financial statements and records 

Financial statements and other aspects of the company’s activities.

Frequency

Yearly

As mentioned in the Act, or on the discretion of the company

Report

Report to the Shareholders as specified under Section 143 of the Act.

Report to the Board of Directors

Related: Tax Filing, Compliances, and Audit for Private Limited Company

Statutory Audits

The purpose of the Statutory Audit is to report the financial status and accounts to the Government and to ensure that the company’s tax liability has been calculated in the manner prescribed by the government.

  • The statutory audit is conducted by ‘external auditors’ of the company.
  • The External auditors are independent parties appointed by the shareholders' vote in the Annual General Meeting.
  • The Audit report is submitted to the Government in the form and manner prescribed.

Statutory audits are conducted every fiscal year, starting April 1, and ending March 31. Statutory Audits are divided into Tax Audits and Company Audits.

Company Audit

Under the provisions of the Companies Act, 2013, every company must have its annual accounts audited, irrespective of its nature of business or turnover. The directors and shareholders of the company will appoint an auditor for this purpose.

  • Under the provisions of the Act, the term of the Auditor is from the completion of one AGM to the completion of the next AGM.
  • Statutory auditors are appointed for a period of five consecutive years (or AGMs)
  • After the term is complete, the auditors must be changed
  • The Ministry of Corporate Affairs (MCA) notified amendments to the Companies (Audit and Auditors) Rules in 2018. According to the new rules, ratification of the appointment of the Auditor in the Company’s Annual General Meeting has been removed until the conclusion of the sixth Annual General Meeting.
  • Only an independent chartered accountant or audit firm can be appointed as the auditors of the company. The Companies Act specifies the disqualifications of an auditor.

Tax Audits

  • Under Section 44AB of Indian Income Tax Act, 1961, tax audits are mandatory for business with a turnover greater than INR 1 Crore. Individual professionals with receipts exceeding INR 50 Lakhs are also subject to tax audits. 

Preparation Audit Report

  • The Company Auditor’s Report Order (CARO) is to be followed by the auditor to prepare the audit report of the company.
  • The audit report will contain an analysis of aspects such as  fixed assets, statutory dues, and inventory

Internal Audits

Internal audits are a part of the company management to check the health of the company and to check overall organizational efficiency.

  • Small companies hire independent firms to conduct their internal audits. However, larger companies have a separate department to handle the financial and process audits of the company
  • Internal audits are mandatory for public companies whose stocks are listed in any of the country’s stock exchanges.
  • Unlisted companies with a turnover of INR 2 crores or with a paid-up capital of over INR 50 crores, or with outstanding loans exceeding INR 1 Billion have to comply with internal audit norms.
  • For companies where internal audit mandatory, the statutory auditor will give his/her opinion on the internal audit system in the audit report.

 


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